Higher yields on Treasuries force equities to pay up or pipe down. When the risk-free rate flirts with 4%, dividend stocks start to look less like income and more like risk — especially the ones with no growth to show for it.
For the likes of Verizon and AT&T, growth didn’t just slow — it packed its bags and left town long ago. Capital-intensive operations eat cash for breakfast and come back starving for lunch. Earnings haven’t kept up with inflation, but capex has.
So the market adjusts. Shares have fallen and now yield in the range of 7–9%. That’s the 4% risk-free rate plus a 3–5% risk premium. Nothing mystical about it. Interest rates are to asset prices what gravity is to the apple.
Verizon now trades where it did in 2010. AT&T, at levels not seen since 1992. Dividend yields hover around 8.3% and 8.2%. Some call it a crash, but gravity isn’t punishment; it’s an elementary law of physics.
Verizon’s cash flow still covers the dividend comfortably for now. But over the past decade, debt climbed $86 billion — nearly matching total dividends paid to shareholders — to fund fiber buildouts, network upgrades, and acquisitions.
With a mountain of debt and higher rates making each refinancing sting a bit more, Verizon will soon have to scale back its capital program. It’s not an if but a when. The whip effect on free cash flow should be immediate. My hunch is that the carrier’s shareholders won’t leave it with choice.
If that happens, the outlook should be steady, dull, and solvent. Which, in telecom land, passes for success. That’s before adjusting for inflation, and without factoring in those lead-sheathed cables buried decades ago, now resurfacing like bad memories.
It’s easier to bury cables than liabilities. Potential environmental lawsuits loom, and the bills could be brutal. Unlike the carriers’ earnings, they will keep up with inflation if they hit.